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Best Coffee Stock: Starbucks, Dunkin' Brands, or Krispy Kreme?

Which company should investors be buzzed about?

Coffee has been a very profitable business in recent years, and major industry players like Starbucks (NASDAQ:SBUX), Dunkin' Brands(NASDAQ:DNKN), and Krispy Kreme(NYSE:KKD) are generating substantial growth for investors. Which one is the best choice for your portfolio?

A global coffee empireStarbucks has built a global empire in recent years: The company owns more than 19,700 stores around the world, and it continues delivering remarkable growth rates for a company of its size.

Revenues during the last quarter increased by 13% on the back of a 7% increase in global comparable-store sales, while earnings per share grew at an impressive 37% versus the same quarter in the previous year.

Importantly, this growth story is far from over considering recent performance and the company's expansionary plans. Starbucks is planning to open approximately 1,500 new stores in fiscal 2014, and acquisitions like Teavana, La Boulange, and Evolution Fresh offer exciting opportunities to expand into new areas and broaden the company's product portfolio in the coming years.

Starbucks owns one of the most valuable brands in the consumer business and provides a unique and differentiated customer experience. This means superior pricing power for its products and above-average profit margins for shareholders.

The company trades at a forward P/E ratio above 23.6, so shares of Starbucks don't come for a cheap valuation. Then again, Starbucks doesn't need to be cheap since it offers outstanding quality and growth potential.

Dunkin' Brands is growing strongDunkin' Brands announced its expansion plans for 2014 on Monday, and the parent company of Dunkin' Donuts and Baskin-Robbins seems to be truly firing on all cylinders.

Management expects its franchisees and licensees to open between 380 and 410 net new Dunkin' Donut restaurants in the U.S., and five to 10 new Baskin-Robbins locations in the country. In international markets, the company plans to open between 300 and 400 new Dunkin' Donuts and Baskin-Robbins stores for a total of 685 to 800 locations, including both brands.

The company still has a lot of room for growth in the U.S.; management believes it can reach more than 15,000 Dunkin' Donuts locations in the country, almost double its current store base. When it comes to international markets, the company is barely taking its first steps.

Dunkin' Brands trades at a forward P/E ratio around 26 times forecast earnings for the coming year. This is a similar valuation to Starbucks; even if Dunkin' Brands doesn't have the same level of brand differentiation and pricing power, the company has more room for store expansion in the long term.

Krispy Kreme tastes goodKrispy Kreme operates more than 810 locations in 23 countries around the world. The company is a consistent performer -- same-store sales have increased over the last 20 consecutive quarters -- but the company is not growing sales as fast as Starbucks or Dunkin' Brands.

The company reported a 6.7% increase in sales for its fiscal third quarter ended on Nov. 3 on the back of a 3.7% increase in same-store sales. Profit margins are expanding as the company grows its store base, operating income rose by 27% during the quarter, and adjusted net income jumped by a remarkable 33.8% year over year.

Krispy Kreme has considerable room for growth; management plans to bring its domestic store count to 400 locations from a current level of 249 stores. Opportunities are even more exciting in global markets, where the company believes it can reach 900 locations by 2017, versus just 563 stores now.

From a valuation point of view, Krispy Kreme trades in line with Starbucks and Dunkin' Brands, as the stock carries a forward P/E ratio near 27.

Bottom lineThe three companies are offering attractive growth prospects over the coming years, and they are trading at similar valuation levels. But Starbucks has superior quality because of its brand differentiation, innovative culture, and outstanding financial performance. Based on price versus quality, Starbucks looks like the best choice for a nice cup of caffeinated growth.

Author

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored.
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